China Firms Lose Interest in Insurance

By Prudence Ho

Chinese companies from home-appliance maker Haier Group to metal giant China Minmetals Corp. in recent years joined foreign insurers in setting up insurance joint ventures in China.

But their inability to break the dominance of China’s top insurers has led many of the Chinese partners—particularly those outside the financial sector—to retreat, and analysts said others are likely to do so.

“We may see some Chinese partners in these Sino-foreign ventures exit the market, particularly the non-financial Chinese partners. Many of the JVs aren’t profitable yet, and insurance is no longer a business focus for some of these Chinese partners,” said Peter Enns, head of the financial institutions group for Asia Pacific excluding Japan at Goldman Sachs Group.

Some have already scaled back. In May, Haier, known for its washing machines and refrigerators, sold the bulk of its stake in a tie-up with Japan’s Meiji Yasuda Life Insurance Co. to unlisted Founder Group, controlled by Peking University. Haier now has around 20% in the venture. Meiji Yasuda holds 29%.

In 2009, Chinese consumer-electronics maker SVA Group sold its entire 50% stake in a joint venture with Japan’s Nippon Life Insurance Co. to Beijing-based Great Wall Asset Management Co.

Foreign insurers seeking to enter China’s life-insurance market have to set up joint ventures with Chinese partners. More than half of the 26 Sino-foreign insurance joint ventures, including the first Sino-foreign joint venture between Manulife International Ltd. and a unit of Sinochem Group, a state-owned chemicals firm in 1996, involve non-financial Chinese partners. Only AIA Group Ltd., the pan-Asian life insurer once owned by American International Group Inc. is on its own, with a full license obtained in 1992 after years of lobbying the country’s leaders.

But China, a potentially lucrative market for insurers, given the size of the population and the low penetration rates, is dominated by domestic players, which had 95% of the market by premiums in 2012, according to China’s insurance regulator China Insurance Regulatory Commission. State-owned China Life Insurance Co., privately owned Ping An Insurance (Group) Co. of China, and China Pacific Insurance (Group) Co., in which private-equity firm Carlyle Group L.P. once had a stake, dominate the market.

Meanwhile, foreign joint ventures have struggled. Last year, 26 Sino-foreign joint ventures collected 47.5 billion yuan ($7.61 billion) in premiums, or just 4.7% of the overall market, according to CIRC. Moveover, that was down from 8% in 2007.

“Most of them were hoping to break even in the first seven to eight years of operations, but it took many of them much longer and many have still not reached this point,” said Stephan Binder, Asia head of the insurance and asset management practice at Mckinsey & Co. “Chinese partners, particularly non-financial companies, are frustrated by the time it takes for the ventures to become profitable.”

Because these joint ventures are private, information on profit isn’t available, but figures on premium growth are. The picture there is often disappointing. Korean insurer Samsung Life Insurance Co.’s joint venture with national flag carrier Air China Ltd. saw premiums fall in 2011 and 2012. Sino French Life Insurance Co., formed by China Post Group, the country’s post-office operator, and French insurer CNP Assurances SA, collected 34 million yuan in premiums last year, down 87% from 270 million yuan of premiums in 2009.

“One of the challenges facing these joint ventures is the failure of certain Chinese partners who own a large customer base to capitalize and cross-sell insurance products, even with the help of foreign insurers,” said Jonathan Zhao, head of actuarial and insurance advisory services for Asia Pacific at Ernst & Young.

Another problem joint ventures in insurance face is the difficulties in expanding beyond where their licenses allow, with hefty regulatory requirements each time. The smaller firms also need constant capital injections from their owners to maintain strict government capital requirements.

Still, the bigger joint ventures, or those with financial partners involved, have been growing. Manulife Sinochem Life Insurance and ICBC-AXA Life Insurance Co, a venture among banking giant Industrial & Commercial Bank of China Ltd., French insurer AXA SA and Chinese metals giant Minmetals, has seen premiums grow in the past three years, according to the CIRC.

And in some cases, the foreign party, not the Chinese partner, is the one that has been scaling back. In 2010 Sun Life Financial Inc., Canada’s third-largest insurer by premiums, reduced its stake in its partnership with China Everbright Group Ltd. to 24.99% from 50% in the “best long-term interest of our shareholders,” it said at the time.

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